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A U.S. healthcare services company is poised to become the single largest player in the Canadian retail pharmacy sector, both supplying and selling drugs at retail, a move competitors say will put them at a disadvantage.

“The supplier who supplies me with medicine now competes with me head-to-head in the market with his own pharmacy,” said Ben Shenouda, an independent pharmacist in Brampton, and spokesperson for the Independent Association of Pharmacists of Ontario.

McKesson Corp. announced Wednesday that it has agreed to buy the 470-store Rexall Health chain, which employs 8,600 Canadians, from the privately held Katz Group, based in Alberta.

BMO Capital Markets retail analyst Peter Sklar estimates that McKesson will operate or supply approximately 2,500 corporate, independent and franchised pharmacies across Canada if the $3-billion deal announced Wednesday is approved.

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That will give McKesson a 27 per cent share in the Canadian retail pharmacy sector, pushing Loblaw Cos. Ltd., with 1,310 Shoppers Drug Mart locations, into second place with 22 per cent of market share.

“There is concern about how this will play out,” said Clint Mahlman, executive vice-president and chief operating officer of London Drugs, which has 78 pharmacy locations in Western Canada.

“McKesson is a very big supplier to us, we need to understand their position on a number of issues,” he said.

“Obviously, when someone is a supplier and a competitor, we’re concerned with how they would use data. It would by very easy for someone of their size to look at what we buy and where, and in a predatory manner, knock out stores in those areas.”

Mahlman said McKesson could also try to negotiate deals with insurers that require them to deal exclusively with Rexall.

“It’s sad to see another Canadian-owned retailer purchased and ultimately managed by a company in the U.S.,” he added.

McKesson will have to manage existing retail and distribution relationships more closely to minimize any perception of favoritism should the company expand with further transactions in the retail space, said David Francis, an RBC Capital Markets equity research analyst based in Nashville, in a note to investors.

“Independent pharmacies and smaller retailers would need assurances that they will not be disadvantaged from a service perspective by McKesson’s potential moves in this regard,” Francis wrote.

A spokesperson for McKesson Canada said the company will continue to treat pharmacy retailers fairly.

“Canada's retail pharmacy and distribution industry is very competitive. This transaction will not change that. In fact, the operations of McKesson Canada and Rexall are complementary with little substantive competitive overlap,” said McKesson Canada spokesperson David Simmonds.

The deal must be approved by Canada’s Competition Bureau, which reviews transactions involving targets whose assets in Canada or revenues from sales in or from Canada exceed $87 million.

The Bureau considers whether the transaction is likely to result in a substantial lessening of competition and considers factors including the level of economic concentration in the industry and market shares, according to spokesperson Sophie Paluck-Bastien.

The last time the Bureau challenged a merger was in December 2015, in the case of Staples’ proposed acquisition of Office Depot. The case is currently before the Competition Tribunal.

Steven Globerman, a professor of international business at Western Washington University and a senior fellow at the Fraser Institute, said the change in ownership is not a concern.

“For one thing, the health care sector in Canada is fairly intensively regulated, and those regulations apply to both foreign and domestically owned companies. For another, competition is the guarantor of efficient performance,” he said.

Jim Danahy, chief executive officer of the Toronto-based retail advisory firm Customer Lab, said there is little concern in the retail community about growing foreign ownership.

“I suppose if we didn’t have any Canadian-owned retail, that would be a problem,” said Danahy, pointing to Canadian Tire, Lululemon and Aritzia as examples of strong national retailers.

And Hudson Bay Company’s U.S. owners have been sinking money into improving stores, even though those undergoing the biggest changes are in locations like Yorkdale and Toronto Eaton Centre and not in secondary and tertiary markets.

“If you visit Nanaimo and Polo Park in Winnipeg, you will not see what you see at Queen and Yonge. You will see flickering ceiling lights and peeling linoleum,” said Danahy.

He said one area of growth for pharmacies is something called medication adherence. Only 50 per cent of people who are given prescription drugs are still taking them six months later, leading to medical complications.

“This is worth $12-billion a year to Canadian pharmacies,” said Danahy.

McKesson’s proposed acquisition of Rexall Health is also subject to review under the Investment Canada Act. Foreign investment transactions are reviewed on their merits based on the overall economic benefit for Canada, according to Stéfanie Power, a spokesperson for Innovation, Science and Economic Development Canada.

“Due to the confidentiality provisions of the Investment Canada Act, the department cannot comment further.”

2004: Hockey equipment manufacturer CCM (The Hockey Company) is bought by Reebok in a US$329 million deal, including the assumption of $125 million in debt.

2008: The Hudson’s Bay Co. is purchased by U.S. private equity firm NRDC Equity Partners. The value of the deal is not publicly disclosed, but representatives for the Bay and NRDC say it's “slightly” higher than the initial sale price of US$1.1 billion.

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